Wednesday, December 10, 2008

Stock Analysis - Titan Industries

Financial Analysis based on company's recent performance and results.The Titan Industries stock has remained fairly resilient to the recent meltdown thanks to the company’s improving financial performance and strong focus on domestic consumption.

However, at Rs 830.80, trading at 23 times its trailing 12-month earnings, the stock seems expensive in the current market scenario. Investors can look for substantial dips in the stock to consider an entry. Given its business potential, expansion strategies and established leadership position, holding on to the stock may prove beneficial in the long run.

The company appears to have the potential to sustain a 20 per cent growth given its improving market share in watches and branded jewellery, presence across price points, and a diversified retail presence. Performance in the third quarter, expected to be a period of good sales due to the wedding and holiday seasons, may hold the key to gauging if the company is vulnerable to a consumption slowdown.

Titan Industries reigns supreme in the watches and jewellery segments. The company, which owns brands Titan, Fastrack, Sonata and Tanishq, has recently diversified into eyewear through Eye+, a segment which combines high revenue potential with strong margins.

Jewellery Though offering relatively thin margins, Titan’s jewellery business has been its key growth engine in recent years. With branded jewellery making up only 5 per cent of the Rs 75,000-crore Indian jewellery market, the potential for expansion appears huge. Tanishq is one of the few nationally recognised brands in this space.

The revenue potential of Titan’s jewellery business is showcased by its 56 per cent CAGR (compounded annual growth rate) over the past three years. That Tanishq derives the bulk of its revenues from domestic jewellery sales (though it does have an international presence) is an advantage when other export-oriented companies in this space may face the impact of recessionary trends in the US and Europe. Titan’s expansion plans include a wider national presence.Jewellery purchasers in semi-urban and rural India tend to be value conscious; yet this segment lacks an organised, branded player. And, the company aims to tap this segment with its economy brand GoldPlus, currently available mainly in the southern states.

Watches: Wide portfolio In the watches business, Titan holds a 60 per cent share of the branded market with watches at all price points; the premium Titan and Xylys brands, Fastrack as a youth brand and Sonata as a budget brand. This enables Titan to capitalise on any trend of consumer down-trading as a result of a more difficult demand environment. The watches business, too, is set for significant expansion, with the company targeting 50 new stores by the end of this fiscal taking the count to 300.

Eyewear: High potentialThe company plans to open 300 new Titan Eye+ retail outlets over three years, of which 20 will be during this fiscal. It has partnered with Chennai-based eye hospital Sankara Nethralaya to train its retail and clinic staff to ensure quality and reliability. Focus will be on designing and retailing eyewear, outsourcing actual manufacture to other brands and reputed labs.

This segment has potential to not only scale up Titan’s retail network, but also to mark up its overall margin profile. The eyewear segment is fragmented, without a nation-wide recognised brand and the company aims to build on this gap with Eye+.

This division has contributed Rs 40 crore to Titan’s revenues in FY08, up from Rs 25 crore in the previous year, when the line was launched. Aggressive store openings will allow Eye+ to service a wider customer base, but there may not be a substantial increase in contribution to revenues in the initial years.

Apart from the above initiatives, Titan plans to further diversify its revenues through tie-ups with international premium players, Hugo Boss and Tommy Hilfiger, to market their products.

Model Titan uses the franchisee model for store expansion. This model allows easy scalability, control on rental costs and relatively lower capex requirements. The company mainly uses standalone stores and does not have a presence in malls, which may make for a higher cost structure.Titan is favourably placed to bankroll its expansion plans (expected at upwards of Rs 100 crore till FY10), given its low debt-equity ratio and healthy cash flows. This may stand it in good stead to keep its expansion plans on track, at a time when most other retailers are carrying a fairly high debt burden and finding it difficult to obtain credit.

Financials Jewellery accounts for the lion’s share of the revenues, increasing from about 54 per cent in FY2006 to almost 68 per cent in FY2008, at the expense of the watches division. Revenues are expected to sustain a growth rate of 30 per cent. Eyewear and precision engineering currently contribute a little over 3 per cent to revenues. Margins have declined on a yearly basis for the past three years, as jewellery operates on lower margins than watches.

However, margins have improved in Q2FY08 over the first quarter due to control in interest and depreciation costs. Margins are likely to remain steady as there may not be significant changes in product portfolio. Returns on investments have also held out above 40 per cent. Leverage has been brought under control by retiring old debt and taking up fresh loans to a smaller extent. Debt-equity ratio stood at 0.66 for FY08, a low number in the context of the retail sector. The interest cover stands at a comfortable 10.5 times, having improved over the past three years.

ConcernsThe company has incurred forex currency losses on account of raw material imports for FY 2008. Another concern is the volatile nature of gold prices and high procurement costs. Hedging strategies will go a long way in addressing this fluctuation. Change in gold prices can also be managed by tagging retail price to gold prices. Additionally, demand for gold is price sensitive, and hikes in gold prices might drive down demand during off-season. Performance of Titan’s new outlets in the US also remains to be seen, as consumer sentiments there remain weak.

As per Sep 08 shareholding of the Titan Industries, Rakesh Jhunjhunwala is holding 2,581,062 shares of Titan Industries in the name of Jhunjhunwala Rakesh Radheshyam.

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